Are you running a business in India or offering professional services in India, and wondering if you are required to maintain books of accounts?
The answer depends on how much you earn or how much you bill your clients. The Income Tax Act, 1961, through Section 44AA, outlines clear rules on who is required to keep financial records and when.
Understanding who is required to maintain books and the consequences of non-compliance is essential for every taxpayer engaged in business or a profession. In this blog, we will understand what maintenance of books is and who is required to maintain it under the Income Tax Act, 1961.
What is the Maintenance of the Books of Accounts?
Keeping books of account means maintaining written records of all income, expenses, and financial activities of a business or profession. These records help both the taxpayer and the income tax department to calculate the correct taxable income.
Legal Framework: Section 44AA
Section 44AA was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from 1st April 1976, to mandate the maintenance of books of account by persons engaged in certain professions and businesses. The primary objective was to assist the Assessing Officer in computing the taxable income of assesses in accordance with the provisions of the Income Tax Act, 1961.
The section is divided into four subsections, supported by Rules 6F to 6H of the Income Tax Rules, 1962. The obligation under Section 44AA is segregated into two categories:
- Persons engaged in notified professions under Section 44AA(1)
- Persons engaged in any other business or profession under Section 44AA(2)
Importance of Maintenance of Books of Accounts
Maintaining books of accounts is important as it:
- Helps the Assessing Officer accurately compute taxable income during assessments.
- Mandatory for tax audit under Section 44AB if turnover exceeds the prescribed limits.
- Essential for the correct and timely filing of income tax returns.
- Required by banks and financial institutions for loan approvals and financial credibility.
- Aids in internal financial management, budgeting, and cost control.
- Helps detect errors, fraud, and operational inefficiencies.
- Promotes transparency, accountability, and better governance practices.
Who Needs to Maintain the Books of Account?
As per Section 44AA of the Income Tax Act, 1961, the following are mandated to maintain the books of accounts:
1. Professionals engaged in specified professions include:
- Legal professionals (lawyers, advocates)
- Medical professionals (doctors, dentists)
- Engineers and architects
- Chartered accountants
- Interior decorators
- Technical or IT consultants
- Company secretaries
- Information technology professionals
- Film artists (actors, cinematographers, directors, editors, etc.)
- Authorised representatives (those representing others in legal or tax matters)
2. Business Owners and Non-Specified Professionals
If you are not in a category of specified profession as mentioned in Section 44AA but are running a business or offering another type of professional service, you also need to maintain books of accounts.
Income Threshold
| Category of Person | Income Limit (₹) | Turnover/Gross Receipt Limit (₹) | Applicability |
| General Business/Profession (Existing) | 1,20,000 | 10,00,000 | If income or turnover exceeds these in any of the 3 preceding years |
| General Business/Profession (New setup) | 1,20,000 (expected) | 10,00,000 (expected) | If expected to exceed the limit in the current previous year |
| Individual or HUF (Business/Profession) | 2,50,000 | 25,00,000 | Higher threshold applies if the business/profession is carried out by an Individual or HUF. |
| Specified Professionals | 1,50,000 | If income exceeds ₹1,50,000 in all 3 preceding years |
What if you are under a Presumptive Tax Scheme?
- If you opt into a presumptive scheme and declare income as per the prescribed percentage, you are not required to maintain detailed books of account, even if your income is above the usual limits.
- However, if you opt out of the presumptive scheme and declare a lower income, and your income exceeds the basic exemption limit (say ₹2.5 lakh for individuals), you are required to maintain books and also get them audited under Section 44AB.
What Books Must be Maintained? (Rule 6F)
If Section 44AA applies, Rule 6F lists the books that must be maintained:
For all notified professionals:
- Cash Book: for daily cash transactions and cash balance
- Journal: Only if using mercantile (accrual) accounting
- Ledger: Summary of all accounts
- Duplicate copies of bills issued (if above ₹25)
- Original bills for all expenses (if above ₹50)
- Payment vouchers if the original bills are not available
Additional Requirement for Medical Professionals:
Doctors and other medical professionals have a few extra requirements:
- A daily case register in prescribed Form 3C, which records patient details and services rendered.
- An inventory of medicines, supplies, and consumables used in the practice at the end of each financial year.
These records must be updated regularly and maintained at the principal place of business or profession.
Where to Keep These Books?
As per Rule 6F (4):
- Keep books at the main office or the place of business/profession
- If working in multiple locations, either:
- Maintain books at each place, or
- Keep all records at one central office
How Long to Keep These Books?
As per Rule 6F (5):
- Books must be kept for 6 years from the end of the relevant assessment year
- If your case is reopened under Section 147 of the Income Tax Act, 1961, keep books until the assessment is completed
Electronic Books of Account
The Income Tax Act, 1961, does not mandate the physical maintenance of books. Accordingly, digital and computerised books maintained through accounting software (e.g., Tally, QuickBooks, Gbooks.io) are acceptable, provided:
- They are readily accessible
- They are chronologically maintained
- Audit trail or log of modifications is available (especially for companies under Rule 3 of Companies (Accounts) Rules, 2014, as amended)
Penalty for Non-compliance
If you are required to maintain books under Section 44AA and fail to do so, you could face a penalty of ₹25,000 under Section 271A of the Income Tax Act, 1961.
Moreover, failure to produce books during scrutiny may result in:
- Best judgment assessment under Section 144, where the Assessing Officer can determine income based on estimation.
- Loss of legal defence during appeal or reassessment proceedings.
Conclusion
As they say, “Good records make good taxpayers.” In today’s compliance-driven environment, maintaining proper books is not only a legal obligation but also a shield against unnecessary hurdles and litigation. Section 44AA, supported by Rule 6F, ensures that taxpayers maintain financial records, which not only aid tax computation but also reduce disputes. All professionals and businesspersons, whether mandated under law or not, are advised to keep books of accounts not as a burden, but as an integral part of financial discipline.
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